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Appreciate the responses. ESOP Guy - In instances I've seen, the comp allocation was implemented where a mature, majority S corp ESOP (e.g., 80%) has a serious 'have/have not' issue, little employee turnover, and receives a very significant earnings distribution each year, compounding the issue. Understanding the different dividend rights issue and single class of stock requirement, I always fall back on the fact that the trust is the shareholder of record. So provided the trust receives its required pro rata distribution, neither the Code, ERISA or state corporate law dictates/restricts how the dividend can be allocated to participants inside the ESOP. Also numerous PLRs in which the IRS has held excess unallocated shares following repayment of an ESOP Loan constitute earnings and can be allocated in any manner the sponsor sees fit (perhaps subject to 401(a)4)). Inasmuch as dividends also represent earnings, it seems the same rationale would apply. While it sounds nice, I can't locate any helpful guidance or instance in which the IRS has audited such an ESOP and acquiesced on the allocation method. Thanks again.

Does anyone have an ESOP client (unleveraged) that allocates dividends on any basis other than share balance (e.g. comp or hybrid). If so, has the client survived an IRS/DOL examination without challenge? We have one takeover client that allocates dividends based on comp (and am anecdotally aware of others that do so). While the client negotiated the allocation language with the IRS and was issued a favorable DL, the plan hasn't been subject to a more rigorous audit/examination. Grateful for any insights and comments!

Privately-owned C corp bank sponsors an ESOP and wants to give participants an election under Code Section 404(k)(2)(A)(iii) to reinvest cash dividends paid to the ESOP in shares of Bank stock. All other issues aside, anyone have insight whether this will cause Bank stock to constitute a "designated investment alternative" under the ESOP for purposes of the 404a5 participant disclosure requirements? Based on a strict reading of the 404a5 regs it appears so - insofar as the ESOP is a "covered individual account plan" and the ability for a participant to direct dividends paid on shares in his account to be reinvested in Bank stock causes Bank stock to qualify as a participant-directed "designated investment alternative" (i.e., an investment alternative designated by the plan into which participants may direct the investment of assets held in, or contributed to, their individual accounts). Any other thoughts out there? Thanks in advance.

VFCP generally provides, to correct defaulted participant loans, the plan sponsor must make a voluntary correction of the loan failures using VCP before submitting under VFCP... Question is - if loan failures are discovered during an IRS audit and subsequently corrected through Audit CAP (instead of VCP), can the sponsor still submit under VFCP to prevent 502 civil penalties or does a sponsor's receipt of a Closing Agreement somehow preclude submitting the loan failures under VFCP because the submission under EPCRS wasn't voluntary? And if VFCP is unavailable, how can the sponsor clear up the fiduciary violations with the DOL? Thanks in advance..